Shelby says Paulson broke word on mortgage limits

The Senate Banking Committee’s top Republican on Thursday accused Treasury Secretary Henry Paulson of breaking his word when he negotiated with Democrats to include a measure lifting Fannie Mae’s and Freddie Mac’s loan limits by more than $300,000.

At a hearing on the two mortgage giants on Thursday, Sen. Richard Shelby (R-Ala.) recounted an exchange he had with Paulson just prior to the Treasury secretary’s talks with House leaders last month when Paulson was helping hash out the stimulus legislation.

Shelby warned that he would confront Paulson on the alleged bait-and-switch at their next encounter: “I haven’t met him lately. But I’m sure I’ll see him again.”

Then, in an exchange with top Treasury official David G. Nason, Shelby voiced doubt about Paulson’s resolve to give Fannie Mae and Freddie Mac a stronger regulator, a cause championed by Shelby and other Republicans. “I’m not sure Paulson is [committed]. He says one thing and does the other.”

The episode illustrates the tensions surrounding the off-and-on push to rein in Fannie Mae and Freddie Mac.

Collectively known as the Government Sponsored Enterprises (GSEs), the two private companies benefit from an implicit government backing. They buy home loans and repackage them as securities. At the end of 2007, they owned or guaranteed $1.4 trillion in residential mortgages.

Democrats say the GSEs are vital to spreading homeownership, while their GOP detractors argue that their huge mortgage portfolios pose an unacceptable risk to taxpayers and the financial system.

The Bush administration last month succumbed to vociferous calls from Democrats to lift GSE loan limits, allowing Fannie and Freddie to inject liquidity into the jumbo loan market. That is important to higher-cost regions along the coasts.

The House-passed stimulus package would temporarily increase the GSE limits from $417,000 to nearly $730,000. In exchange, Paulson extracted a promise from Senate Banking Committee Chairman Chris Dodd (D-Conn.) that he would follow the House and push legislation this year to give the GSEs a strong new regulator.{mospagebreak}

The House approved legislation last year to beef up oversight of the GSEs after the current regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), proved powerless to prevent massive accounting scandals at the GSEs in recent years. However, GSE reform has stalled in the Senate, despite the administration’s strong backing of the House-passed bill.

At Thursday’s hearing, Dodd pleaded with lawmakers to move beyond the ideological debate over the existence of the GSEs. “We need to get down to the hard work of crafting a balanced bill that will create the kind of regulator we all agree is needed.”

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Yet he appeared far apart from Shelby and other panel Republicans on reforming Fannie and Freddie. He said the GSEs were “riding to the rescue” in the current housing crisis and argued they ought to do even more to help troubled borrowers.

Meanwhile, Shelby seemed loath to expand their role. He blasted the loan limit increase as reckless in his testimony, saying it represents a 75 percent rise “despite the fact that this committee has not held one hearing, has built no record and has no clear picture as to the status of the jumbo market and whether it really needs this kind of help at this time.”

He asserted that by lifting the loan limits, Congress and the administration would be lending a hand to the rich while putting taxpayers at risk.

“Just so we are clear, an individual would need a yearly income in excess of $150,000 to even qualify for a $700,000 home loan,” Shelby read from prepared remarks. “Once again, instead of thinking of ways to protect the American taxpayers, we are actually considering ways to further expose them for the benefit of those making healthy six-figure salaries.”

OFHEO Director James B. Lockhart III, who has been pressing Congress for GSE reform, warned that the GSEs had lower capital than other financial institutions, despite the capital surcharges imposed on them after their accounting misadventures.

Their mortgage purchases as a share of total new originations have more than doubled from 2006 to the end of 2007, he said, adding that this activity has begun to take a toll: Both companies are expected to report annual losses for 2007.

Meanwhile, one of the GSEs’ biggest champions, Sen. Charles Schumer (D-N.Y.), criticized them for not doing more to help rescue sub-prime borrowers, pointing out the favorable borrowing costs they enjoy due to their quasi-government status.